Strategy, Innovation, Business Models, Proptech, RETech

Space-as-a-Service: Powered by Blockchain?

Stayawhile’s effort to allow seamless moving between furnished apartments has implications for other types of property.

Stayawhile.com operates a network of furnished apartments in cities such as New York, London, and Berlin. The company aims to empower the increasing number of people who “travel often and spontaneously” to “move freely from place to place without signing leases or buying homes”. The medium-term accommodation business involves plenty of friction. Stayawhile is betting on Blockchain to turn its vision into a reality.

Does the world need another ICO? We’re not sure. But unlike many Blockchain-powered ventures, this one is run by industry professionals, who work in a real office in the center of Manhattan, with prior backing form reputable investors such as Founders Fund and NEA. In addition, the company makes a reasonable case that it turned to Blockchain in order to create real utility for customers —as opposed to just taking the opportunity to raise money without consequence. This puts it in a credible position to create a positive example for others to follow.

As a result, Stayahile is a good case study for those seeking to understand Blockchain’s potential to reshape the real estate industry. This short article aims to provide some background on the ICO process, delve into the company’s plan and motivations, and consider the possibility of failure and the implications of success.

The Known Unknowns

The world of cryptocurrencies is rife with speculation, ignorance, and uncertainty. An SEC announcement from last week offers a case in point: RECoin was purported to be “The First Ever Cryptocurrency Backed by Real Estate”, advised by a “team of lawyers, professionals, brokers, and accountants”, and backed by up to $4 million of investor money.

The Securities and Exchange Commission alleges that RECoin sold unregistered securities, misrepresented the level of expert advice it received, and lied about the amount of funds it has raised.

The launch of a blockchain-related venture is often called an “ICO”, or Initial Coin Offering. The analogy to corporate IPOs is dangerously misleading. So-called ICOs usually involve the sale of a fixed amount of tokens. Unlike traditional currencies or securities, tokens are not merely stores of value or ownership rights, and often have additional functionality.

Tokens are generated by distributed apps — Dapps— that can be programmed to trigger specific actions once pre-defined conditions are met, enabling the creation of smart contracts*. Such contracts are signed digitally and enforced by software. They have the power to transfer money and information, and their execution is automatic, meaning it is not dependent on the strength of any specific legal system. We’ll address how these can be used in practice later in the article.

Medium Term, Long Process

Furnished apartments have everything a guest needs, and are usually cleaned regularly and serviced on demand. In theory, guests should be able to move in and out whenever they like.

In practice, a variety of financial and structural barriers make this process painful: Landlords and their financial backers are wary of short-term renters; and even for traditional leases, they require substantial cash deposits, the sharing of financial data with infamous third-party credit agencies such as Equifax, and lots of paperwork.

Foreign nationals have it even worse: They don’t have a credit score or local income. This, in turn, means they often put down higher security deposits — which they have less time to try to recover once it’s time to move out. Foreigners also have to deal with the cost of international money transfers and exposure to currency fluctuations.

A little bit goes a long way

Stayawhile plans to generate a token, named “Stayabit” (stay a bit), in order to mitigate the above problems. The company will start pricing all its apartments in Stayabits as well as in traditional local currencies. Customers who own Stayabits could use them to pay for their bookings, avoiding transfer and credit card fees. Those that pay with Stayabits will also enjoy booking priority and discounted rates. Individual benefits will be commensurate with the amount of tokens owned by the customer.

If demand for Stayawhile’s apartments grows, the tokens might appreciate in value. For example, a nightly booking that is priced at $100 or 10 Stayabits in 2017 might be priced at $100 but only 8.5 Stayabits in 2018. This means that those who bought-in early could benefit from an increased buying power.

Stayawhile plans to replace security deposits with some type of smart collateral, allowing users to keep more funds in their wallet: If and when a pre-defined event triggers additional costs, these will be automatically deducted (for example, when failing to check-out by a pre-agreed time). The user’s payment history and account balance can be used as an alternative to traditional credit scores, allowing people to build a reputation that exceeds national boundaries and avoid third-party credit agencies.

In theory, tokens can also serve as a form of digital identification. Combined with smart digital locks, members could be able to use Stayabits to open doors. This would mean that a single digital (trans)action could trigger the booking, a reputation-based approval, the payment, a smart deposit, and the issuance of a key that is valid only during the booking period and allows access to a furnished apartment in the real world.

That last point captures Blockchain’s mind-boggling potential: The contract is no longer something to be followed by action; the contract is the action. Smart contracts don’t just make it easier or faster to book, confirm your identity, put down a deposit, pay, and receive a virtual key— it collapses all of these steps into a single, irreversible event.

Beyond the benefits for customers, the company itself hopes to benefit from more efficient operations, nurture a loyal member base, and attract underserved international customers. Selling the tokens in advance will also provide funds that can be used to finance ongoing operations and expansion.

Mind the Dapp

Tokens and distributed apps have the potential to reshape the way real estate assets are booked, accessed, and paid for. Like many new technologies, they also present uncertainty around a few key issues.

First and foremost, while tokens are different from traditional securities, the SEC may still treat them as such. This treatment could be applied retroactively. The determination is based on the Howey Test and takes into account whether money is invested with expectation of profit, whether the profits are a result of the efforts of a third party, and more. The fact that tokens can appreciate in value and can be resold for a profit leaves them open to be treated as investments products. Stayabit Tokens have specific utility, are not listed on an exchange, and do not promise expectation of profit. It is not clear if this would be enough for the SEC, but it’s a worthy effort.

Second is the issue of liquidity. Once tokens are acquired, it might be costly or time-consuming to convert them back to cash. Initially, Stayabits will only be converted to Ether (the native currency of Ethereum), and from Ether back to USD or other traditional currencies. If and when the tokens become more popular, it might be possible to exchange them directly.

Another aspect of liquidity concerns transactions within Stayawhile’s network. Since there is a set amount of tokens, the success of the business might create perverse incentives: Speculators will choose to hold onto their tokens instead of using them to pay for the company’s services. If I am not mistaken, this could limit the number of tokens in circulation and leave an opening for the market to be cornered by one or more large investors. This is unlikely to happen but interesting to consider.

Third, the relatively volatile value of tokens needs to be balanced against operating costs that are tied to more stable traditional currencies. Apart from being a business challenge, this, too, creates arbitrage opportunities for speculators. There might be a theoretical method to address this, but there aren’t enough precedents that show how it would work in practice.

Fourth, the Ethereum blockchain on which the tokens are generated is currently limited to processing around 7 token transactions per second (compared to around 200 for Paypal and more than 50,000 for Visa, for example). This may become an issue as Stayawhile’s network expands and becomes more popular. Developers are working to increase Ethereum’s capacity, which will hopefully grow in line with demand.

In case Etherum’s constraints become an issue, it might also be possible to transition the tokens to run over an alternative network. Also, Stayawhile’s business relies on a low volume of transactions (1 monthly payment per customer), so they are not likely to experience processing bottlenecks.

Finally, I would mention my own limited ability to judge the technical aspects of token sales, and the general difficulty in assessing technologies that are put to a new use. I do look favorably at the fact that Stayawhile is not using the ICO as its main source of funding and that the company already has an operating business that seems to be going well (as opposed to most ICOs that raise money based on nothing more than a “whitepaper”).

Final thoughts

Overall, the possibilities are inspiring and I hope Stayahile succeeds in putting the technology to good use. This would help standardize solutions that can serve other types of assets — from flexible offices and through hotel rooms, through self-storage and package lockers, to longer-term commercial and residential leases.

Dror Poleg works with some of the world’s most innovative real estate investors, operators, and technologists to bring to market products that reshape the way people live, work, and travel. Follow @drorpoleg on Twitter or visit Rethinking.RE for his latest research.

*So far, most distributed apps run on the Ethereum platform as it allows for general-purpose programing. Bitcoin, on the other hand, was designed as an alternative to traditional money with the limited purpose of making payments and storing value. This makes Bitcoin generally safer, but also less flexible, in the same way that a physical 25-cent coin can only be used to pay 25 cents, while a wire transfer instruction provides much more flexibility but is also more prone to errors and abuse, and takes longer to process.